Laura Martin: Real Options and the Cable Industry

(w/ P. Tufano) HBS Case 201-004.

CSFB equity research analyst Laura Martin publishes a report on valuing Cox Communications that introduces an innovative approach to valuation. She contends that EBITDA multiple analysis, typical for the cable industry, is flawed because it overlooks the value of the "stealth tier" (unused capacity on cable companies' fiber optic network). Martin proposes using real options valuation to impute value to the stealth tier, and she thereby arrives at a higher valuation for Cox stock. This provides the context for contrasting several valuation methodologies--traditional DCF analysis, regression-based ROIC and multiple analysis, and real option theory--and assessing how selected assumptions impact the various valuation techniques. In particular, Martin reviews ways in which the industry is evolving and students can think about how these changes impact which valuation method is most appropriate. More generally, this case provides a context for discussing the role of equity research analysts, highlighting all the constituencies they serve and how this can create conflicts of interest. Martin's application of real options theory provides an opportunity to evaluate where it works, where it doesn't, and why.